The economics of biscuits, buildings & bikes

What started as murmur nearly a year ago after the implosion of Infrastructure Leasing & Financial Services , is turning into hysteria — the demand for a rescue package from the state. It has spread from just the non-banking finance companies to almost everyone in town.

That the conservative custodians of policy making — the Reserve Bank of India, and an eternal optimist like Aditya Puri of HDFC Bank — are admitting to the slowdown, is an indication that the economy needs a push from super powers.

Global giants such as the US, Germany and China are working on both monetary and fiscal stimulus to revive slumping demand — whether it is due to domestic factors or trade war. India too needs one, but unfortunately battered state finances leave little room.

Stimulus is welcome for the industry and consumers because it automatically leads to better material well-being. But the flipside of it is like steroids — a limited quantity during ill-health may be helpful, but abuse leads to lingering side effects. The seeds of the current economic pain were sown in 2008-10 when the stimulus remained in place for long. Promoting consumption isn’t just in the hands of policy makers, but industry too could, provided it has a heart.

Under Governor Shaktikanta Das, monetary authorities have been more than active to do their bit — be it slashing interest rates by 110 basis points, or making the system liquidity surplus. Partly thanks to adopting inflation targeting as a policy objective.

Still the industry says credit is expensive. There’s a reason for it. They should look at the more than Rs 10 lakh crore of loans turning sour because of them. Yes, businesses can fail but should at least refrain from stalling resolution. Frauds such as CG Power, Manpasand Beverages, and resignations of auditors at Reliance Capital and Reliance Power are not covering industry with glory either.

Thankfully, New Delhi doesn’t appear to be indulging in ‘phonebanking’ unlike earlier. Finance minister Nirmala Sitharaman claiming credit for banks’ clean-up would be lost if the government gets tempted to do so in desperation.

Why are interest rates not falling despite the RBI cut and liquidity push? Bankers say they don’t want to take risk. It’s not just investigative agencies, but untrustworthy borrowers. For now, nudge banks to take risk rather than order. Just take a leaf out of Ben Bernanke’s book and flood the system with liquidity that bankers don’t have a choice than taking risks.

This government repeats its commitment to fiscal deficit targets enshrined in statute even if some numbers are questionable. That may be the right thing to do if the objective is to build long-term trust rather than short-term gratification.

The state can either reduce tax rates or borrow more to build infrastructure. But bond markets would just revolt. Expecting a government that is running a revenue deficit of Rs 4.85 lakh crores, or 2.3 per cent of the gross domestic product to borrow and spend is more fantasy than reality.

Real estate developers are seeking to enhance ‘affordable home’ price ceiling to Rs 1 crore in cities such as Mumbai for buyers’ benefit. The state should sacrifice revenue, but builders not their profits.

Some worrying scenarios have been projected at Parle, Britannia, Maruti and others where thousands are losing jobs. One argument is that high goods and services tax rates are hitting consumption.

Parle’s Mayak Shah told ET’s Ratna Bhushan that the firm may have to lay off up to 10,000 workers if their demand for reducing 18 per cent GST doesn’t come through. Earlier, biscuits were taxed at 12 per cent and industry expected it to be 12 per cent for premium biscuits and 5 per cent on the ones that commoner consumes.

A back of the envelope calculation shows that under GST a Rs 5 pack of biscuits would attract 30 paise more tax per packet. Does a consumer rebel from purchasing because of a pack getting 30 paise more expensive? Debt laden companies may find it difficult to pass on higher tax incidence due to fear of losing market share.

But what about the likes of Britannia which enjoy 40 per cent gross margins and Maruti that pays 5.2 per cent royalty to parent Suzuki Motor which derives three fourths of its $18 billion market value from Indian unit holding? If businesses are serious about sales growth can they compromise a bit on prices or pampering the parent firm.

The slowdown should also be seen in relation what happened in previous years.

Between 2014 and last fiscal, truck production rose 59 per cent to 1.11 million, data from the Society of Indian Automobile Manufacturers. Motorcycles and scooter production grew 45 per cent. Car sales climbed 35 per cent.

Between 2014 and now equity markets captured the movement too. Maruti Suzuki rose 453 per cent between January 2014 and July 2018. It is off 36 per cent since but is still up 252 per cent. Britannia soared 659 per cent to Rs 3,450 and off 31 per cent since but is still up 420 per cent.

One sane voice in this cacophony is Bajaj Auto managing director Rajiv Bajaj. He admits industry’s mistake of over production and unwise business practices. Furthermore, he asserts that a 5 to 7 per cent fall in sales at dealer end is not a ‘crisis.’ It also opens up room for management to correct past mistakes and turn more efficient, says Bajaj. An admirable attitude from the scion of the ‘Bombay Club’ leader for others to emulate!

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